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Focus on ECB’s Greek Bonds

Central bank said to oppose restructuring of its holdings of Greek debt.

The European Central Bank remains firmly opposed to any restructuring of its Greek bond holdings as the debt was acquired for monetary policy purposes, according to two people familiar with the Governing Council’s stance.

While the ECB faces pressure to join private-sector investors in taking losses on Greek debt, the central bank sees this as potentially damaging to confidence in the institution if it were to take part, said the people, who declined to be identified because the matter is confidential.

International Monetary Fund Managing Director Christine Lagarde said today that European governments and other public holders of Greek debt may have to increase support if private creditors don’t go far enough. Investors and European finance ministers remain at odds over how much private investors should shoulder in the Greek bailout.

“Once again, policy makers leave the room and hope the ECB will fill in,” said Thomas Costerg, an economist at Standard Chartered Bank in London. “The risk is that by putting the ECB on board, as the IMF asks, this could result in debt swap negotiations restarting from scratch, which could mean additional delay to an already over-stretched timetable.”

German Chancellor Angela Merkel’s government will oppose any attempt to make the ECB accept a writedown on its Greek bonds, senior coalition lawmaker Michael Meister said in an interview today.

ECB President Mario Draghi said on Jan. 19 that the ECB is “not party” to ongoing discussions between the Greek government and the private sector. The ECB is in talks regarding a potential swap of its Greek bonds that would ease the country’s debt load and avoid losses at the central bank, the New York Times reported today, citing unnamed officials.

An ECB spokesman declined to comment.

Greek bondholders meet today in Paris to discuss their response to European officials’ demands that they take deeper losses on their holdings of Greek debt to help bring the nation’s borrowings to a sustainable level.

Institute of International Finance Managing Director Charles Dallara, who’s negotiating on behalf of the bondholders, said yesterday that all parties, public and private, should contribute to cutting Greece’s debt. Dallara stressed that private investors hold only about 60 percent of Greece’s 350 billion euros ($454 billion) of debt. The IIF is a Washington- based industry group with more than 450 members.

Dallara’s View

“It is important for all parties to recognize how much we all have at stake here and work together and co-operatively to find a solution,” Dallara told reporters in Zurich. “Some might minimize the risk of an involuntary debt exchange and point to other cases such as Argentina. I would caution against that attitude.”

European officials and Greece’s private bondholders agreed in October to implement a 50 percent cut in the face value of more than 200 billion euros of debt by voluntarily exchanging outstanding bonds for new securities, with a goal of reducing Greece’s borrowings to 120 percent of gross domestic product by 2020. The accord is tied to a second financing package for the cash-strapped country, which faces a 14.5 billion-euro bond payment on March 20.

The latest offer from the IIF would lead to a loss of about 69 percent on the net-present value of Greek bonds, two people with knowledge of the talks said. The new 30-year bonds would carry an average coupon of about 4.25 percent, said the people, who declined to be identified because the talks are private.

“If the level of Greece’s privately held debt is not sufficiently renegotiated, then public creditors, holders of Greek debt, will also have to participate in the financial effort,” Lagarde told journalists in Paris.

European finance ministers meeting in Brussels signaled they would push Greece’s private investors to accept bigger losses, with coupons below 3.5 percent for debt to be serviced until 2020 and below 4 percent over the 30 years of the next Greek package.

The ECB has opposed any “involuntary” restructuring of Greek debt that would trigger the payment of credit default swaps, and extracted a 35 billion-euro guarantee for bonds held as collateral on its books from European governments last year.

‘Costly’ Move

Asking private investors to take a loss on Greek holdings has proved “costly for the euro zone” as it sends a message that “euro zone sovereign debt should no longer be considered a safe asset with the implicit promise that it would be repaid in full,” ECB Governing Council member Athanasios Orphanides wrote in the Financial Times on Jan. 5, calling for the plan to be jettisoned.

The ECB began buying Greek government debt in May 2010 as the sovereign debt crisis flared, saying the move was needed to maintain the transmission of monetary policy as bond yields soared. It now holds about 36 billion euros of the nation’s bonds, Barclays Capital estimated in a Jan. 6 report.

Greece’s creditors won’t help the country get a handle on its debt by taking losses on sovereign bonds, according to the Kiel Institute for the World Economy. Greece’s debt load will be “unbearably high” even if public creditors join investors in taking 50 percent writedowns on the debt, the institute at the University of Kiel in northern Germany said in a study published on its website.

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